Underlying inflation ran at a faster than expected monthly pace in August, leaving the door open for additional interest rate hikes from the Federal Reserve. Core consumer prices—which exclude food and energy prices—advanced 0.3% from July, the first acceleration in six months. From a year ago, it increased 4.3%, in line with estimates and marking the smallest advance in nearly two years.
Overall inflation rose 0.6% from the prior month, the most in over a year, and 3.7% from a year ago, reflecting higher energy prices.
The CPI is one of the last major reports the Fed will see before its meeting next week, in which policymakers are largely expected to hold rates steady.
After the data was released, the odds of further Fed tightening by year end rose nominally. November’s odds stand at 52% and December’s are at 64%. These are sentiment indicators and can change radically based upon the data. The Fed has made it abundantly clear all monetary policy decisions will be data centric.
As inferred above, the markets were generally unfazed by the data as it was not a disaster. It is largely expected inflation will increase over the next several months. The question is by how much.
Today both the PPI and retail sales are released. How will the data be interpreted?
Last night the foreign markets were up. London was up 1.17%, Paris up 0.39% and Frankfurt up 0.20%. China was up 0.11%, Japan up 1.41% and Hang Seng up 0.21%. NASDAQ and Dow futures are up 0.40% and 0.28%, respectively on the belief that the Fed is close to an end on this monetary tightening cycle. The 10-year is up 2/32 to yield 4.26%
Kent Engelke
Chief Economic Strategist Managing Director
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